Reform is never easy, and pricing carbon to reorient Australia’s economy away from carbon-intensive activities looks to be one of the most difficult yet. But at least it’s being done in the middle of a boom when we can all afford it, right? Well sort of.
My press gallery colleague Bernard Keane recently contrasted the timing of this reform with the second wave of tariff reductions, begun in a time of recession. He wrote that when the “government unleashed its second round of tariff reform in 1991, the economy was already plunging into recession. The reform, necessary as it was, exacerbated a serious downturn and helped turn it into a years-long period of high unemployment that wrecked tens of thousands of lives, not to mention the Keating government’s budget.
“For anyone prescient enough, it would have made sense back then to warn of the impacts of reform and urge delay. Now, unemployment is below 5% and one of the biggest dangers to the economy is skills shortages.”
His assessment is correct. The pain of reform was intense, but it laid the foundations of a more productive economy that made Australians richer and helped the nation sail through the GFC. And with the employment market now drum-tight thanks to the resources boom, it would, on the face of it, seem a good time to begin the long structural adjustment of carbon reform.
Actually, the government knows it has little choice. Action to reduce carbon emissions by 5% from 2000 levels by 2020 — the target both Labor and the Coalition have committed to — grows more expensive the longer it is delayed. ClimateWorks, a foundation hosted by Monash University in partnership with The Myer Foundation, this month released a report estimating that: “If no further action is taken before 2015, the cost of reaching the 5% reduction target within Australia in 2020 will increase by $5.5 billion per annum for businesses and households.”
So Labor must press on with the reform — as, incidentally, the Coalition would have had to with the tax-funded Direct Action plan it took to the last election.
And yet Labor should understand by now that the resources boom is actually not a good time to sell the package to voters. Because while in aggregate the economy seems to be rocketing along, out in the mortgage belt voters are having a hard time believing “they’ve never had it so good” (as John Howard put it during the first phase of this boom).
How do we know this? Well firstly, they’re not shopping like they used to. Retailers are growing increasingly desperate to shift stock and are slashing prices — December quarter CPI figures showed clothing and footwear prices falling by 4.8%.
Secondly, though the miners and unions are battling over wages blowouts — cleaners in the mines can make $100,000, with some highly skilled workers such as undersea welders grossing as much as $450,000 — wages growth in other sectors is not following suit. ACTU secretary Jeff Lawrence complained at the end of last year that “unit labour costs are at a record low, indicating that workers are not being rewarded for … productivity gains”. He is right for a huge number of Australians working in retail, manufacturing, tourism, education and other struggling sectors.
But perhaps the biggest reason for many voters to think they can’t afford carbon-tax induced price increases is found hidden in the RBA’s credit aggregates data, where the end of a house-price linked “wealth effect” is becoming clearer by the day.
While there are conflicting stories in the media about what’s happening to median house prices, price-to-income ratios or auction clearance rates, the RBA’s aggregate data is harder to argue with. And it shows a dramatic and continuing decline in a long-standing component on Australian income — namely, the debt we took on via housing finance to spend on consumption over the past decade.
Readers may remember Steve Keen’s sage warning of a year ago, that the then-emerging trend towards borrowing less and saving more would have a dramatic effect on the apparent wealth of Australians. Well that vanishing is continuing apace as the chart below shows. The short version of Keen’s argument is that when the housing market is rising, it’s relatively easy to extract equity from one’s home and fritter it away as “income”. We still have the shiny cars and overseas holiday snaps to prove it.
But when house prices stall — and though they may not be falling, I don’t think anyone is predicting any substantial growth in the years ahead — both consumers and banks start to see such borrowing and spending as reckless.
And so while the housing credit extended to owner-occupiers and investors is still growing, currently at just under 5% in real terms or 7% nominal, it is in dangerously low territory. As the chart shows, it has broken below 5% in real terms for only the third time since 1980.
In the mortgage belt, the voters Julia Gillard needs to win over for the next election are increasingly aware that their houses are no longer appreciating as they used to, and in cities such as Perth and Brisbane they may well be depreciating. Equity withdrawal and the wealth effect that flowed from it are all but over. And to put the icing on that rather glum looking cake, the Gillard government wants to make a range of everyday commodities and product more expensive.
That’s a tough environment in which to start a long and painful structural reorientation of the economy.
That’s why Labor has twice mentioned a carbon price of $20 per tonne in the past week — the very bottom of the range recommended by its carbon-pricing advisor Ross Garnaut. While it might not reduce emissions much in the early years of carbon pricing, that might be the only price sellable to an increasingly hostile electorate.
And it will come with lashings of household compensation. After all, the wealth effect has to come from somewhere.
*This article first appeared on Business Spectator.